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It’s hard to believe that here we are again trying to figure out what Europe will do over the weekend. In our case a long weekend.

In spite of the fact that the Greek story has been out there for almost 2 years now, it still drives the market. Virtually all of the big moves this week came on the back of Greek headlines so it is impossible to argue that it is “priced in”. My best guess is that a resolution (which the market believes is most likely) sparks a 2%-4% rally. A default (which I think is most likely) sparks a 5%-10% decline. So at these levels I will be short as I think the most likely move is lower, and the move lower is likely to be bigger. With the market being choppy, being nimble remains a key.

Yesterday was one of the bigger swings we’ve had. The S&P moved almost 2% and is starting to feel like it did last fall – either extremely well bid with no sellers, or feeling ugly with no buyers and almost no middle ground. Be careful about high yield. Everyone is still talking about the “flows” but although JNK has been able to attract some new money, HYG has not added a single share this week. HY may be cheap, but if the new flows dry up, it will struggle from here.

The CPI data is also important. The fed has set a 2% “target” and talks and acts like we are running below that rate, when in reality, inflation is above their target. An upside surprise here would be bad for the markets as it would be yet another argument against QE. The economic data has been good (though I believe influenced by unseasonably good weather), but the market is impacted by the hopes of QE, so asides from Greece, that is the other big story to watch.

The market has a tendency to do well after the credit guys leave on holiday shortened trading days. So with the desire to believe that Europe will not let Greece default (in spite of evidence to the contrary) the markets may remain in rally mode for the day because no one wants to miss the imminent resolution of the crisis. I am far more convinced that we will get some very disappointing headlines because the situation really doesn’t work, and the tone of Europe has switched from “No Default” to “No Disorderly Default”.